Mortgage insurance premiums can increase your monthly budget significantly—an additional $83 a month or so at a 0.5% rate on a $200,000 mortgage. However, in 2006, Congress made these payments tax-deductible to help reduce the burden of these costs. The tax deduction was scheduled to last through the 2016 tax year, but it has been extended through at least 2020. That means that the tax return you file in 2021 could include this deduction.
Here's what you need to know about the mortgage insurance premium deduction.
What Is Mortgage Insurance?
Lenders typically require private mortgage insurance when they feel that there's a higher risk of default on the part of the homeowner. The mortgage insurance helps the lender secure the debt in the event of default.
In general, you can expect to pay for mortgage insurance when you can't (or don't want to) put down at least 20% on the property. The insurance policy can be issued by a private insurance company or by the Federal Housing Administration (FHA) or the Department of Agriculture's Rural Housing Administration. The Department of Veterans Affairs (VA) has a one-time funding fee instead of monthly mortgage insurance.
The Legislative Roller Coaster
The Tax Relief and Health Care Act first introduced the mortgage insurance deduction back in 2006. Congress extended it in 2015 when it passed the Protecting Americans from Tax Hikes (PATH) Act, but the deduction expired on December 31, 2016. The extension was good for only one year.
This is one of those tax deductions that tends to expire and be resuscitated on an annual basis, and in 2018 Congress stepped in again. The Bipartisan Budget Act of 2018 retroactively extended the mortgage insurance premiums deduction again through 2017. The Further Consolidated Appropriations Act, 2020 extended the mortgage insurance premium deduction again through December 31, 2020.
On January 8, 2019, California Representative Julia Brownley introduced the Mortgage Insurance Tax Deduction Act of 2019, which would permanently enshrine the deduction in the tax code and would apply to all amounts paid or accrued since December 31, 2017. However, as of November 30, 2020, no further action had been taken on the bill.
Deductions for mortgage insurance payments are different from deductions for mortgage interest and real estate taxes—those remain intact despite being adjusted a bit under 2017's Tax Cuts and Jobs Act (TCJA).
Loans That Qualify for Deductions
The mortgage insurance premium deduction applies only to loans taken out on or after January 1, 2007. Deductions related to mortgages must be for a home acquisition debt on a first or second home. A home acquisition debt is one whose proceeds are used to buy, build, or substantially improve a residence.
You typically can't rent the second home out—you must use it personally, such as a vacation home you visit in the summer. You might still qualify for a deduction, however, if you treat the second home as an income-producing business asset. Home equity loans don't qualify for the deduction, nor do cash-out refinances. However, refinance loans up to the amount of the original mortgage are covered.
This deduction phases out and becomes unavailable at higher income levels. If you're single, filing as head of household, or married and filing jointly, the deduction begins phasing out by 10% for each $1,000 by which your adjusted gross income (AGI) exceeds $100,000. In effect, this means that you're not eligible to claim the deduction if your adjusted gross income exceeds $109,000. If you're married and filing separately, the phase-out begins at $50,000 and increases for each $500 by which you exceed this limit, effectively making you ineligible if your AGI exceeds $54,500.
Claiming the Deduction
Mortgage insurance premiums paid during the year are reported on Form 1098. You should receive this form from your lender after the close of the tax year. You can find the amount you paid in premiums in Box 5. There’s currently no limit on the amount of the deduction you can claim if you and your loan qualify. You can deduct this entire amount.
Mortgage insurance premiums are itemized tax deductions. They're reported on line 13 of Schedule A, "Interest You Paid." You can’t claim the mortgage insurance premiums deduction if you claim the standard deduction—you must itemize using Schedule A.
If you neglected to claim this deduction in previous years, although you could have, you can typically amend your tax return with the IRS up to three years after you file the original return (or two years after you've paid any tax due on that return, whichever is later).
Canceling Your Insurance
It can pay to check your current mortgage balance against your home's fair market value, even if it turns out that you can claim a tax deduction for PMI again. You no longer have to pay private mortgage insurance when your equity in the property exceeds 20%, but it's unlikely that either your lender or the insurer will point that out to you.
No one will voluntarily cancel your policy for you when you hit this magic number, but you can. Be prepared to have your home appraised, or get a value otherwise assigned by a professional, so you can prove that the insurance is no longer required. That way, regardless of whether Congress extends the deduction, you'll at least save on monthly costs by canceling your policy.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to them. For current tax or legal advice, please consult with an accountant or an attorney.